Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for February, 2011

This week we saw a new way in which Chavez imposes his power in order to interfere with the will of the voters, restricting democracy.

-First, Chavez picked single handedly his own choice for Governor of Apure in 2004 and 2008 in the person of Captain Jesus Aguilarte Gamez.

-Gamez turns out to be a so so Governor, somewhat corrupt, despite this Chavez hand picks him for a second term in 2008, his wedding last Fall is known as the wedding of the century now, Chavez turns against him publicly a couple of weeks ago, asking for his resignation “in the name of unity”

-Chavez names former Vice President Carrizales as “Executive Secretary” of Apure State, to watch over Aguilarte Gamez.

-Aguilarte refuses to resign until who knows how he was threatened and yesterday he quit, arguing “health reasons” Carrizales temporarily replaces him as Governor. (Curiously, Carrizales resigned as Vice-President also arguing health reasons, good to see he has recovered fully)

I wonder what Apure voters think of Chavez-style democracy, where he gets this weird veto power over the voters wishes. I wonder if the outgoing Governor will ever be charged for anything. I wonder if the Comptroller will ban him from running for office.

Once again, Venezuela, this time via its oil company PDVSA, gets ready to issue a bond which puzzles markets. As investors were asking for more transparency, more order and fewer surprises in the country’s issuance, PDVSA did exactly the opposite, announcing the sale of a US$ 3 billion issue to be sold via the banking system and with identical characteristics to the Venezuela Global 2022 bond issued by the Republic last August.

There are many puzzles:

-Why make it identical to the existing sovereign bond?

-Why pay a coupon of 12.75% when it would have sold equally well at a lower coupon? In fact, the Global 2022 was issued at a time last August that the yield curve was much higher than it is today.

-Why issue something so unexpected, after sending different signals to investors that are asking for more clarity?

In fact, even though the prospectus says the issue has been approved by the Superintendent of Securities, that office had approved other issues with different characteristics in the last few weeks, but not this one. This also leaves the puzzle as to why after all the publicity surrounding the Public Exchange, this is not being issued there, given that it has become Chavez’ pet project.

PDVSA had been sending very different signals in the last few weeks. In private it was telling investors it would issue the US$ 3.15 billion that it sold to the Central Bank and its pension funds, plus another US$ 3 billion through the Public Exchange. Then, high level insiders at PDVSA were saying, it would issue around US$ 2 billion in the second half pf 2011.

Well, so much of talking to officials to get real and transparent information. Instead, PDVSA issues an identical bond to an existing one, eliminating even the uncertainty of where the new bond (and the old one for that matter) should trade.

You see, The Government issued and identical bond, with a coupon of 12.75% and equal amortizations in 2020, 2021 and 2022, last August. This bond came out last summer at a time that Venezuela was yielding much more than it is now. In fact, when that bond first came out, its price was 78% and it had slowly risen to 88% (88.4% today) as Venezuela’s bond prices improved over the last few months.

Currently, the only dollars people have some access to is the SITME dollars at the Venezuelan Central Bank. Lots of rules, scarcity and all that, but that is the only one you can get at a price of Bs. 5.3 per US$. This is the reference price for everyone.

So, if the PDVSA bond is sold at 100%, with a 12.75% and identical conditions as the Global 2022, if it were to trade at 88%, it would mean you are buying dollars at a price of Bs. 4.88 per US$ (Bs. 4.3/0.88, that is you pay 4.3 for each dollar of bond, but when you turn around and sell the bond you only get 88 cents for each dollar)

But those that get the bonds (rules for this are not known until the bond is assigned) would be willing to sell at 81%, where you are basically buying dollars at the same rate as the SITME rate, the only available rate in the country to mere mortals: Bs. 5.3 per US$.

The result? The Global 2022 will start dropping in price, as investors sell it to buy the lower priced bond with a higher yield to maturity. Because, while there are differences in yields between some Venezuelan and PDVSA bonds, all of these have technical explanations, such as the fact that the 2014, 2015 and 2016 were issued under local law and the PDVSA 2017 has too much supply and more coming from the Venezuelan Central Bank.But as a general rule there is no much difference between the two yields to maturity.

For example, the PDVSA 2027 and Global 2027 yield roughly the same, thus one would ot expect the PDVSA 2022 and the Global 2022 to have a yield to maturity that is not too different.

But they will be different for a number of reasons. First, there will be more supply of the PDVSA 2022 initially, it will be lower, you are buying dollars for more Bolivars. Second, the Global 2022 will drop but not trade identically to the PDVSA 2022.

For any Venezuelan getting their hands on the PDVSA 2022, it will be cheap. They will be cheap at Bs. 4.88, at Bs. 5.3 and even higher. Since there is scarcity and the parallel market is illegal, people will be happy to buy these bonds and thsu these dollars even at higher prices.

But the Government, somehow and mysteriously, does not want to take advantage of this, selling the dollars higher and getting more Bs. for them.

Why?

Is it capitalistic populism?

No idea. Another puzzling issue by Venezuela, this time around by our friends at PDVSA.

El Nacional has an article today about PDVSA’s natural gas plans in the 2007-2013 Development Plan. Like all of the “plans” by the revolution, it hasn’t worked out very well. What I had no clue about about was how badly it was going.

The plan was grandiose: “The gasification project is a social service considered strategic to improve the quality of life of the population, because it assigns the greatest contribution in happiness to the most humble sectors of the country”

Last year, the plan was relaunched, because up to now only 1% of the homes targeted had been supplied with natural gas to the home using pipelines. Only 20,000 homes of the 2 million planned now can say they have the service.

What’s the problem? Well, basically everything. The project called for investment of US$ 2.3 billion, however, roughly only US$ 580 million of this has been disbursed so far. Moreover, this budget is being revised, because steel pipes and labor have gone up due to both inflation and devaluation. The article notes that in Colombia, a similar plan gave 4 million people access to direct natural gas and it took 10 years to do it.

But it is not only a matter of building the infrastructure, with the fall of oil production, there is still a shortage of natural gas in the country. PDVSA emphasized the distribution of gas bottles, taking over 60% of the distribution from the private sector. But the lack of natural gas for the bottles has increased delivery from three days to 21 days. (An employee at work spend a full day in order to insure he gets a bottle)

The consequence? People buy electric burners for their homes, not only increasing consumption, but adding to the strain in a sector that has also been critical for the last two years.

The solution? Expropriate more gas bottle companies, sign an agreement with Belarus, announce that you will accelerate the program.

In the 1980’s phone service in Venezuela was the pits. It got to the point that to get a call through, you had to try two or three times before you even got a dial tone. If your phone stopped working, sometimes you had to wait months before the line was fixed. If you had no phone, you had to wait sometimes years before you got service.

Then in 1991, the company was privatized, part of it sold to GTE, later taken over by Verizon, and the service started improving.I still recall the night of Chavez’ coup in 1992, I connected to the Internet to a network of Venezuelans on then nascent Internet called Atarraya and stayed connected all night. I was afraid that if I disconnected my modem, I would not be able to get a dial tone again.

The arrival of cell phones helped, the company go a new revenue stream, which it used to fix up the system. Then the Internet came, first dial=up and later DSL, called ABA here, another new strong revenue stream for a company which now even had competition. In 1997 the remainder shares of CANTV were sold to the public, both in Venezuela and abroad and the company’s stock listed in the New York Stock Exchange. By the time Chavez arrived in power, the company gave good service and was profitable.

In late 2006, Mexican Carlos Slim tried to take over the company for $21 a share. As the regulator considered the tender, Hugo Chavez feeling like the rich Dictator of Venezuela ordered that the Government buy the company. Rather than spend the money on housing or hospitals, Chavez spent two billion US$ buying the company to satisfy his unlimited desire for power. Amazingly, he offered $17.6 per share, less than what Slim was offering, and one investment fund in the US, Brandes, still has an arbitration case pending because of this at the World Bank.

Move forward three years later after the nationalization and we have come full circle. After only three years, CANTV’s service has begun deteriorating. My own phone stopped working about two or three weeks ago and every time I report it, I am told about a different date for my line to be back. Right now the target date is February 18th. , making it sound like the old CANTV. I am not alone, I have heard lots of people facing similar problems for the first time in a decade and half. (I ahve asked that I don’t be charged the service for all this time and have yet to find a way to ahve this done at CANTV)

While I have no voice line, I still have DSL, which is a little surprising, I thought it came over the same pair of copper wires. Except that it seems as if it gets worse every day. Right now for example, this is what I get if I do a speed test at speedtest.net:

This is actually much better than it has been in the last three days. Of course, it is abominable service, I pay for over triple that download speed and the upload speed is just laughable. In fact, the post is likely to take a while to upload, so instead of saving the draft as I write and correct, I am copying it so as not to lose my work.

Yesterday the service got even worse, my download speed was about 20% of that above, but I learned from Twitter that this was generalized. I was unable to read El Universal last night and the New York Times page took forever to download. I did manage to read it only once. People in Twitter reported all sorts of different problems, depending on where they were.

But as local newspaper El Nacional reported this problem, the Government’s attitude was to deny this was happening. It got so laughable that a former Minister of Telecommunications denied this was taking place, not only denying that the problem existed, but assertively saying that this was a media campaign to manipulate opinion on internet services in Venezuela. He even went further, specifically blaming Alberto Ravell, formerly of Globovision for the campaign, saying:

“Ravell is mounting a campaign of manipulation on the internet services, launching rumors to measure the reaction to them”

Curiously, CANTV reported today that the problem had been fixed in a press release, saying that it was found at one of the distribution points for the DSL service in the country.Only two or three times in the last four years has Internet service suffered like this.

We truly have come full circle under Chavez. A service we had taken for granted like telecommunications, has now gone the same route as water, electricity, infrastructure. Much like the Government does with everything, the solution is to distract, deny, escape responsibility. Billions of dollars wasted in buying out companies only to later run them into the ground, wasting precious funds that could be used to solve the myriad of problems that people face, from infrastructure, to health, to poverty, to education.

It is just another step in the destruction of the country’s infrastructure by the revolution, as the Chief Terminator moves on to other problems he has ignored for the last twelve years. Unfortunately, this will be more work (and money!) whenever the reconstruction of the country begins anew or will become another promise by Chavez, if he stays in power, the day the CANTV problem becomes so general, that people begin to complain massively.

Chavismo has an incredible ability to come up with creative new ideas. These guys, who never seem to be able to complete a project or even manage one, seem to always be thinking of new imaginative ways to screw up the country.

The latest one s a report that the Cabinet is thinking of imposing a salary cap on private sector salaries. Your immediate thought is that this is once again a measure to make us all poor, rather than having all of us be well off, that is how socialism works., no?

Well, you are wrong. This has nothing to do with narrowing the gap between rich and poor (funny how they always want the upper layers to come down, no?). Nope. The idea has nothing to do with equality, or with narrowing down the difference between rich and poor. It is actually qute clever. The objective is… (drum roll)

To lower inflationary pressures!

You see, despite what that dead guy with the Nobel prize from the University of Chicago said, Chavismo does not buy this monetary explanation. They like their explanation better, obviosuly there is inflation because wealthy people have more money (Even if there are few wealthy people and lots of poor ones), not because Chavez increased the money supply in eight years by a factor of 15.(Do these guys ever stop to think about what they are saying?)

But think about it. Capping salaries in the private sector will affect only a small amount of salaries, no? If everyone is as poor as Chavez says, and there are so few noisy, capitalistic oligarchs, then it is those salaries that will be capped and according to Chavista lore there are few people in this category, no?

But then, of course, some Chavistas think they are smarter or more knowledgeable than others. While Chavista Deputy Sanguino, President of the Finance Committee of the National Assemby thinks it is a very interesting idea in terms of fighting inflation, the VP of the same Committee is not so sure. He thinks that the inflation problem can be solved by stopping speculation, thus, says Deputy Farias, we have to concentrate in the Anti-Monopoly laws. He also thinks that being underdeveloped has a lot to do with inflation, but apparently he has no clue on how to get us out of that, so he will concentrate in the first law.

Meanwhile, the Devil sits here in his ignorance wondering what part of:

“Inflation is a monetary phenomenon”, these guys did not understand.

Let’s see, in 2003, monetary liquidity in public hands stood at Bs. 18.7 billion. Eight years later it stands at Bs. 295 billion. That is an increase of 1,577 %. An increase of almost 16 times more bills, coins, however you want to imagine or count them.

Is the country producing 15 times more?

Obviously not, But there is 15 times more money chasing for the same goods, plus the increase in GDP, which is about 50% in that period. So, you have 15 times more money and only about 0.5 more goods.

Guess why there is inflation?

But, they will likely approve this crazy idea and when inflation persists, they will blame the phases of the moon, astrology or El Niño, but somehow they will never imagine that this guy Friedman from the Evil Empire had any clue as to what he was talking about.

But if you don’t get Friedman, just see the picture of the little kid above and you will get the whole picture of what Friedman meant.